The ArborGen Opportunity Presentation Materials June 20, 2018 - - PowerPoint PPT Presentation

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The ArborGen Opportunity Presentation Materials June 20, 2018 - - PowerPoint PPT Presentation

The ArborGen Opportunity Presentation Materials June 20, 2018 FORWARD-LOOKING STATEMENTS There are statements in this Presentation that are forward looking statements. As these forward-looking statements are predictive in nature, they


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SLIDE 1

The ArborGen Opportunity

Presentation Materials – June 20, 2018

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SLIDE 2

FORWARD-LOOKING STATEMENTS There are statements in this Presentation that are ‘forward looking statements.’ As these forward-looking statements are predictive in nature, they are subject to a number of risks and uncertainties relating to Rubicon and ArborGen, many of which are beyond our control. As a result of the foregoing, actual results and conditions may differ materially from those expressed or implied by such statements. In particular, ArborGen’s operations and results are significantly influenced by the general level of economic activity in the various sectors of the economies in which it competes, particularly in the United States, Brazil, New Zealand and Australia. Fluctuations in industrial output and the impact that has on global demand for wood fibre and hence harvesting and reforestation levels, government environmental and regional development policies, capital availability, relative exchange rates, interest rates, the profitability of our customers, can each have a substantial and material impact on our operations and financial condition. ArborGen-specific risks and uncertainties also include (in addition to those broad economic factors noted above) the global markets and geographies in which it operates, intellectual property protection, regulatory approvals, public and customer acceptance of genetically engineered products, the rate of customer adoption of advanced seedling products, the success of its research and development activities, weather conditions, cone and seed inventories, biological matters, and the fact that ArborGen’s annual crops and seed orchards are not the subject of insurance cover. As a result of the foregoing, actual results and conclusions may differ materially from those expressed or implied by such statements.

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SLIDE 3

What is ArborGen’s mission in life?

To revolutionize productivity in global plantation forestry … By applying advanced technology … To critical tree traits ... To create new products that deliver ‘step-changes’ in tree-performance

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SLIDE 4

The productivity revolution in agriculture will be repeated in forestry ... the agriculture ‘winner’ was the First-Mover

Global, Widespread Need for Food Increasing Global Demand for Sustainably Grown Wood First Mover First Mover

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Global Area of Biotech Crops 1996 - 2016

Source : ISAAA, 2016

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SLIDE 5
  • “Corn parallel” - gives insight into the opportunity for ArborGen’s advanced genetics to lift yield in forestry

The forestry opportunity is significant if it follows the agriculture model

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Double-Cross Hybrids Single-Cross Hybrids Open-Pollinated Varieties

Yield (bushels / acre)

Biotech Current stage

  • f US

forestry seedlings

Forestry Terminology Transgenic (or GE) Varietal MCP (mass control pollinated) OP (open pollinated)

ArborGen’s Advanced Genetics Product Platform

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SLIDE 6

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Normal distribution of seedling outcomes – natural pollination Variety = identical replication of very best MCP seedling outcome – no variation and hence no normal distribution as the mean is the identical replication of the best MCP seedling

GE = Best Variety / Clone

with biotech trait added MCP = normal distribution of seedling

  • utcomes, but with superior mothers

and fathers matched under controlled conditions moving the mean of the distribution to the right

Technology employed determines extent of genetic ‘step-up’ – its about re-shaping / breaking the normal distribution curve

  • Bio-informatics
  • Cryopreservation
  • Cell replication
  • Somatic embryogenesis
  • Genomic selection
  • ArborGen is the
  • nly global

integrated commercial player

  • perating across

the entire technology spectrum

  • ArborGen’s current

focus is on MCP and varietals, which do not require any regulatory approval process to be met

  • There is only one
  • ther commercial

US MCP player – ArborGen is the leading player

  • There are no
  • ther US Varietal

participants, as the technology is proprietary to ArborGen

  • Value to the

forest owner increases with each step in the technology continuum

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SLIDE 7
  • The table below shows the value levers available to forest owners – advanced genetics is the one that ‘moves the dial’

the story – as highlights

The ArborGen Opportunity - advanced genetics is ‘the’ value lever

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Forest value sensitivity analysis

Potential per acre value increment over base US OP loblolly pine

1.0 1.2 1.4 1.6 1.8 2.0 BLV increment (x)2

1 The precise pine value increment is dependant upon the MCP/Varietal genetics adopted, silviculture regime, and site index, amongst other factors 2 BLV refers to ‘bare land value’, which can be thought of as the NPV of a single rotation

Gain to be achieved from a 10% reduction in silviculture costs

MCP/Varietal 1 Site prep Competition control Fertilisation Planting Base OP BLV2 2.5 3.0

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SLIDE 8
  • Advantages of AG’s US MCP and Varietal loblolly pine ‘genetic chips’ over industry standard OP

the story – as highlights

The ArborGen Opportunity – how do advanced genetics add value?

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*Vsual representation of smaller core in radiata pine, leaving greater 4x2 structural component – representation only

1.Superior log out-turns  More volume  … on less land  Higher saw-log out-turn

Note: Saw-logs sell for 2.5-3x pulp logs

  • 2. Improved uniformity
  • 3. Shorter rotation length
  • 4. Survival / disease resistance
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SLIDE 9

the story – as highlights

Pre-requisite #1 – the germplasm advantage

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Federal Paper Board Co.

Germplasm repository (i.e. base genetics and superior crosses) from hundreds of years in aggregate of tree improvement by leading international forestry players

Germplasm is critical – technology alone is an insufficient pre-condition for success

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SLIDE 10

the story – as highlights

Pre-requisite #2 – the ‘tree machine’ has been built

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  • There are no global integrated commercial competitors to ArborGen in this arena
  • ~US$300 million invested over 15+ years to complete the model
  • No-one else has been able to build / put in place ArborGen’s ‘end-to-end’ integrated Tree Machine platform
  • Intellectual property portfolio is secure, with ‘freedom to operate’
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SLIDE 11

Prerequisite #3 – global commercialisation channels have been built

Campinas, SP, BR (South America HQ) Summerville, SC (Global HQ) Whakatane, NZ (Australasia HQ)

Brazil

  • Foothold established
  • Large eucalyptus market
  • pportunity
  • Producing ~55m pa

eucalyptus & pine

  • ~10% of market

New Zealand and Australia

  • ~40% share of total NZ

addressable market

  • Customers include majority of

the largest landowners in NZ

  • Producing ~20 million pa
  • Upside from NZ Government’s

1billion 10-year tree planting program United States United States

  • ~30% share of total SE loblolly

pine market

  • Customers include some of

the largest landowners

  • Producing 300+ million pa

(incl ~30m non-loblolly)

ArborGen operates ~14 nurseries, 15 seed orchards, 30 distribution centers, and 2 R&D facilities around the world

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SLIDE 12

US market advanced genetics conversion – the ‘big picture’

12 Value of Advanced genetics

time

* Directional representation only as to timing and volumes

Selling Price of seedling

100 150 200 250 300 350 400 450

Seedling sales M per annum

OP MCP & VARIETAL

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SLIDE 13

US Stage 1 – moving customers from commodity OP to ArborGen’s MCP products

USc

  • Genetics are proven
  • Compelling value-proposition for ArborGen to up-sell existing customers to MCP
  • ArborGen customers want the product today
  • ArborGen’s existing manufacturing process is in place and proven
  • ArborGen has an established pricing ladder already in place for MCP (refer slide 20)
  • MCP production has zero technology risk
  • MCP products do not need regulatory approval
  • Competition is limited – a new entrant would take time (amongst other things!)
  • Would require scale manufacturing capability
  • Would need customer channels and customer relationships
  • Would require MCP product to sell!

− Take 8+ years just to develop a commercial MCP orchard from ‘standing start’ − … assuming you possessed the genetics to do so

For ArborGen, MCP-conversion is a lower-risk deliverable strategy

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SLIDE 14

Improvement in ArborGen’s financials is consistent with ‘big picture’ progress

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(AG Consolidated under US GAAP)

  • $10
  • $8
  • $6
  • $4
  • $2

$0 $2 $4 $6 $8 2015 2016 2017 2018 2019F

EBITDA1

US$ millions

1 Pre transaction-related costs, impairments, and one-off non-operating costs

$0 $5 $10 $15 $20 $25 2015 2016 2017 2018 2019F

Gross Margin 1

US$ millions

1 Pre depreciation

  • $15
  • $10
  • $5

$0 $5 2015 2016 2017 2018 2019F

Operating Cashflow

(post interest, pre capex & nwc) US$ millions

  • $20
  • $15
  • $10
  • $5

$0 $5 2015 2016 2017 2018 2019F

Free Cashflow

US$ millions Note: 2015, 2016, 2017, 2018, 2019F (forecast) refer to fiscal years ending 31 March.

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SLIDE 15

the story – as highlights

How does this all relate to the Rubicon share price?

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Value Upside

1 Bank debt + capitalised finance leases, less cash at bank 2 After final US$10m deferred payment to be made (on the AG acquisition) on 1 July 2018, and receipt of US$2.5 million from the Tenon Liquidation in calendar Q3, 2018

Note: Ex-Cellfor shareholders have 5% warrants outstanding over ArborGen

RBC Current Book value Mid-Case Enterprise value - US$ m 106 170 363 less RBC debt 1,2 - US$m

  • 18
  • 18
  • 18

RBC market capitalisation - US$ m 88 152 345

NZ$:US$ cross rate 0.6900 0.7205 0.7205

RBC market capitalisation - NZ$ m 127 211 479 RBC share price implied - NZ$ cps 0.26 $ 0.43 $ 0.98 $

% increase over the current RBC share price 66% 277%

Annual Report Note 15

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SLIDE 16

the story – as highlights

How can we think about book value? – i.e. + 66%

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Value Upside

CY forecast numbers CY+2 numbers required to support book value, using mid-point of the above multiple metrics

=> We believe the Book Value of NZ 43 cps is supportable and achievable

Note: CY means current fiscal year ending Mar 31 2019, and CY+2 means two fiscal years beyond the current fiscal year (undiscounted)

CY CY+2 Curr price Book Value 106 Implied AG value in RBC

US$m

170 0.26 RBC share price implied

NZ$ cps

0.43 2x Revenue multiple CY+2 2-3x 15.1 EBITDA multiple CY+2 10-15x 50-55 Revenue

US$m

68 ~ 7 EBITDA

US$m

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SLIDE 17

=> We believe these driver assumptions are supportable and achievable

the story – as highlights

… And how can we think about the mid-case value?

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Value Upside

Note 15 to RBC Annual Report

1 3 4 2

1 Estimate only, as market was materially impacted by hurricanes Irma and Harvey , which distorted the last season 2 10-year terminal point, per Note 15 to the 2018 Rubicon Annual Report 3 Excludes ~ 30 million of non-loblolly pine seedlings

Mid-case Mar'18A Scenario2 Market seedling size - m/pa 800 1 1,000 AG market share - % 30% 40% OP 69% 163 35% 140 MCP & Varietal 31% 73 65% 260 AG loblolly seedling volume - m/pa 236 3 400 Average US$ margin p/seedlng ~6c

3

~4x US market - loblolly pine

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SLIDE 18

the story – as highlights

… And how can we think about the mid-case value? Market Size

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Value Upside

1

  • Unsurprisingly, the seedling market size is correlated to wood use (with a harvesting -> replant ‘lag’)
  • Previous ‘mid-cycle’ market size ~1 billion per annum in loblolly pine seedlings
  • The current cycle should repeat that seedling volume pa
  • One of the key leading indicators (of wood use) is US housing starts (see chart below)
  • … and also renovation and remodelling growth with expanding US economy and retail spending
  • … and restricted (tariff-based) imports of lumber into the US

500 700 900 1,100 1,300 1,500 1,700 1,900 2,100 2,300 1975 1980 1985 1990 1995 2000 2005 2010 2015

Total New Privately Owned US Housing Units Started

Thousands of Units, Seasonally Adjusted Quarterly Rate 1960 - 2018

Source: U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, Housing Starts Current Mid-cycle 1 Tenon estimate

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SLIDE 19

the story – as highlights

… And how can we think about the mid-case value? Margin p/seedling

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Value Upside

  • US advanced genetics pricing ladder is already in place …

 The industry is prepared to pay for superior genetics  Forest owners are already paying 7x base OP prices  The immediate focus is on MCP  MCP pricing is 3.0 – 4.5x base OP pricing

  • AG’s US margin per seedling will grow with -

 Mix change  Value share increase (as log prices recover)  Inflation  Incremental annual improvement in genetic-value of AG’s MCP and Varietal products  Varietals transition

  • Comparisons with the more ‘advanced’ NZ market today are interesting …

 Current AG bareroot MCP price in NZ is ~US$26 cents per seedling  Current AG bareroot MCP price in US is US$19.51 cents per seedling

2

1 ArborGen’s MCP-select list price

  • US$
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SLIDE 20

the story – as highlights

… And how can we think about the mid-case value? Market Share %

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Value Upside

  • Market Share growth from 30% to 40% is a function of -

 The value delivered to the forest grower by AG’s genetics  A portfolio of improved products in the pipeline  The absence of any serious market competition  AG’s leadership position in production and quality  Targeted capacity expansion in higher-growth provenances

  • Key short-term constraint is MCP seed supply –

 Currently selling all MCP that AG can produce in key provenances  Supply is a constraint for the next two years  Annual MCP supply should then move to a surplus situation  AG’s annual US growing capacity is not a constraining factor  Current capacity is ~330m+ loblolly seedlings pa  Plans are in place to increase capacity over time to ~400m units … @ cost ~US$5 million

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SLIDE 21

the story – as highlights

… And how can we think about the mid-case value? Product Mix

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Value Upside

  • US product-mix assumptions are not aggressive compared with NZ -

 NZ was an ‘early adopter’ of advanced genetics  On the basis of the NZ adoption curve, AG’s US market assumption is conservative

  • To date, MCP adoption has been constrained by MCP supply

 This constraint is being removed (refer previous slide)

  • Recent history of growth in MCP + Varietal (combined) unit sales …

 … supports a continued advanced genetics adoption thesis

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2017A 2018A 2019F

50m 100m Units m

Note: 2017A, 2018A, 2019F (forecast) refer to fiscal years ending 31 March.

Current Terminal ArborGen - NZ 80% ArborGen - US 31% 65% MCP & Varietal

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SLIDE 22

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?????

Another slice: Brazil ‘foothold’ established - significant growth potential

#1 Eucalyptus Varietals

  • Conditions are favorable for ArborGen to become a leading supplier of Eucalyptus varieties

 Non-integrated growers do not have access to advanced genetics  Growers are facing continued pressure to improve productivity  Market is under-served

  • ArborGen is well positioned

 Has 20-year license to sell IP Brazil’s high-performance varieties in this market  Has production / sales rights to other clones under confidential agreements  Is currently developing its own superior varieties for later commercialisation  Sold ~50 million eucalyptus varieties in 2018 fiscal year  … representing <10% of total market and <20% of the addressable market  … and AG’s addressable market will expand as its genetics portfolio and provenance-reach grows

  • Short-term weakness / uncertainty is expected …

 Disruption with industry activity (e.g. Eldorado takeover)  Political and economic uncertainty  AG’s Brazil operation will remain at the current ~EBITDA breakeven (pre R&D) in the immediate term

  • Brazil market size will recover with wider country economic recovery

 AG forecasts the Brazil eucalyptus seedling market to grow from ~ 600m seedlings pa to ~ 900m pa

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SLIDE 23

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?????

Another slice: Brazil ‘foothold’ established - significant growth potential

#2 Loblolly Pine MCP & Varietals

  • Conditions are favourable for ArborGen to enter the loblolly market in Brazil

 The market lags the US in terms of maturity and availability of genetics  …and is under-served  … with non-integrated growers planting mostly low genetic OP seedlings

  • ArborGen’s strategy for loblolly market share growth …

 Leverage its own superior loblolly genetics from the US (OP elite and MCP)  Leverage varieties unique to Brazil (ex the CellFor acquisition)  Establish field trials across multiple regions to enable it to expand its provenance reach  Sold ~8 million seedlings in 2018 fiscal year  … representing just 11% of the Brazil market currently  This should grow as AG expands it provenance reach and increases its ‘advanced’ sales

  • AG projects loblolly market to grow over next 5-10 years to ~130 million seedlings
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SLIDE 24
  • ArborGen sits at the intersection of a growing global wood demand-supply imbalance
  • Enhancing the productivity of forestry is the answer to this emerging imbalance …
  • The advanced-genetics transformation that occurred in agriculture will repeat itself in forestry
  • ArborGen’s goal is to revolutionize productivity standards in the global forestry industry
  • The technology revolution that has occurred in agriculture will also occur in forestry
  • ArborGen is a ‘first mover’ in commercializing advanced forestry-genetics technologies
  • ArborGen’s technology is advanced, proprietary, and can create significant value
  • The market opportunity is large
  • ArborGen has a pipeline of commercial products that do not require regulatory approvals
  • ArborGen has no commercial global integrated competitor
  • ArborGen is the largest global provider of commercial tree seedlings
  • ArborGen’s model is lower risk through the breadth of its product pipeline, multiple end-market uses and geographies, the full

spectrum of technologies it applies, and the existing market channels already in place

the story – as highlights

ArborGen’s Story – a one page concluding “snapshot”

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